The rapid growth of asset-based finance (ABF) has attracted the attention of the private credit world, but taking advantage of these opportunities requires specialized expertise and a strong operational infrastructure capable of supporting complex ABF positions, explains Kanav Kalia, managing director, Oxane Partners.
Asset-based funds (ABF) are simply too big to ignore. At one time, this was considered a niche area of private credit, but its rapid growth has made it one of the fastest growing areas in the ecosystem. In fact, this is now estimated to be an opportunity set at around $20tn (£14.8tn) in size. But as ABF measures, the conversation is no longer the same as the size of the opportunity. It is increasingly about the expertise, operating model and infrastructure required to achieve it successfully.
ABF has not only grown in scale, but has also expanded in scope and become more sophisticated. Today it covers a wide range of collateral types, including receivables, equipment, payments, mortgages and specialty financial assets. ABF is also no longer episodic or only opportunistic. It is now a mainstay in the private equity portfolio with a robust deal work.
ABF has become an institutional market, which is replicated rather than driven by displacement. It no longer works on the margins and now commands more consideration from independent credit providers. As the market matures, developing a solid understanding of how ABF is evolving, and the operational demands that come with that evolution, are increasingly important to investors seeking to access the growth opportunities it presents, especially as demands related to monitoring, servicing, measurement and reporting continue to increase.
The growth of ABF nuance
ABF is growing at an amazing rate, but its rate does not come from the uniform market, but rather from the many special pockets of opportunity. Growth is increasingly shaped by basic financial needs, becoming more cyclical than broad, as money flows into defined, structured contexts of use rather than common commodity areas.
As competition increases, greater responsibility is placed on how lenders can access these opportunities and what they bring to the table. Structured credit facilities are increasingly being used for private, unsecured ABF opportunities. Like many places in private debt, this makes ABF attractive not only for its size and diversification benefits, but also for its ability to support different strategies.
As ABF continues to evolve, sector-specific expertise will be a key factor in what opportunities lenders can access. In practice, that means that non-technical firms are increasingly partnering with specialist suppliers, which reinforces the importance of domain knowledge and operational capabilities in successfully accessing the market.
Being a core share
All of this is pushing ABF from the fringes to a core allocation in many sovereign debt portfolios. In lieu of satellite capture, the ABF’s scale, diversity, resilience and ground-based defenses made it more difficult to ignore. The market is seeing a growing alignment between initial scale, capital formation, and long-term investment appetite.
However, such a large change in ABF’s fortunes can cause unintended consequences. Many private credit firms offer additional services to ABF, but achieving the standard brings operational problems that are not easy or cheap to fix. The challenge is no longer just to find ABF opportunities but to manage them effectively as the market matures and expectations around portfolio oversight, valuation, transparency and regulatory scrutiny continue to grow.
Eligibility criteria, basic lending instruments, agreement structures and reporting rates all require high operational discipline, which requires private credit firms to adjust the existing infrastructure. As with ABF portfolios, this also exposes the limitations of different workflows and sub-point solutions. What is urgently needed is a more interconnected infrastructure to support monitoring, reporting, control and transparency across the spectrum of ABF.
Taking ABF to the next level
The opportunity for ABF is clear and huge but accessing these opportunities successfully is another matter. Not only will a real measure of resources be required to make progress on ABF, with the depth of origin set to be a real difference, but the complexity of this asset class cannot be ignored. The evolving nature of the industry also raises interesting questions about the specific responsibilities of each group. For example, how can institutions participate in ABF with transparency and control? What role will banks and institutions play as ABF continues to grow? And what operating model can support iterative growth without losing control?
It is clear that the next phase of ABF’s growth will be defined by behavior, not just financial availability. Firms will need an infrastructure that can manage asset diversification, orderly cash flow, and manage portfolio quality at scale. For ABF, that challenge is more difficult: the operational demands of monitoring diverse assets, managing recurring reporting requirements, and maintaining visibility across complex structures quickly outgrow fragmented workflows and point solutions. Technology is becoming important not only to improve efficiency, but to balance oversight, improve transparency and support faster decision-making, with better information. In this sense, the infrastructure increasingly allows limited participation in ABF.
That is why the role of professional technology providers is becoming more important as the market grows. As institutions build for the next phase of ABF, they are increasingly looking for a complex purpose-built operational infrastructure for ABF, rather than adapting tools designed for niche markets. At Oxane, this has informed the development of Oxane Panorama over the past decade, designed to support ABF’s transparency, control, monitoring and reporting requirements in a scalable and repeatable manner.
He excelled in ABF
The good news is that, as ABF continues to grow, it is becoming a broad enough opportunity for more investors and firms to participate. But doing so requires a real understanding of the resources, complexity and operational discipline of this asset class. Managing ABF requires a combination of domain expertise and technology, and the firms that build a competitive edge in this space will be those that invest in operational infrastructure as a key differentiator and force for success.
This is promoted content published in partnership with Oxane Partners.
